Question

One of the computer manufacturers is studying manufacturing 20,000 transistors through the unused capacity for their machines. They expect the following costs to be incurred: $40,000 direct material, $100,000 direct labor, $40,000 Indirect material, $40,000 machines depreciation, and $25,000 building depreciation. The company has an offer to purchase the transistor at $8 from an external supplier. The company should:

[[selectone]]

a. Purchase the transistors from the external supplier

b. Manufacture the transistor internally

c.
Both alternatives will give similar results

d. We cannot determine

Answer 1

ANSWER: -

Option a: Purchase the transistors from the external

EXPLANATION: -

Differential analysis on make or buy decision transistors

	Make	Buy
Direct material	$40,000
Direct labor	$100,000
Variable overhead	$40,000
Purchase cost		20,000*$8 =$160,000
Total relevant cost	$180,000	$160,000

Financial Advantage/ Dis-advantage = $180,000 - $160,000 = $20,000

The financial advantage for the company as a result of buying 20,000 transistors from the outside supplier will be $20,000. Therefore, the company should Purchase the transistors from the external.

NOTE: - Depreciation of building and machine are fixed costs that will not be affected by the decisions, therefore these costs are irrelevant to the Decision making. Hence, they are ignored.